Fashion & Apparel Law Bloghttps://www.fashionapparellawblog.com
Legal Issues Facing the Fashion, Apparel & Beauty IndustryFri, 08 Dec 2017 20:19:33 +0000en-UShourly1https://wordpress.org/?v=4.7.8Subscribe with My Yahoo!Subscribe with NewsGatorSubscribe with My AOLSubscribe with BloglinesSubscribe with NetvibesSubscribe with GoogleSubscribe with PageflakesSelective Distribution Systems and Bans on Sales of Luxury Products via Online Market Platforms: Initial Thoughts on the CJEU’s Coty Judgmenthttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/mBMhPomMx6o/
https://www.fashionapparellawblog.com/2017/12/articles/antitrust/selective-distribution-systems-and-bans-on-sales-of-luxury-products-via-online-market-platforms-initial-thoughts-on-the-cjeus-coty-judgment/#respondFri, 08 Dec 2017 20:19:33 +0000https://www.fashionapparellawblog.com/?p=1993Continue Reading]]>The Court of Justice of the European Union (CJEU) confirmed in a short judgment of 6 December 2017 that a prohibition imposed on authorized distributors from using third party platforms for the sale of their luxury products is in line with European competition law provided certain conditions are met. This judgment also ends an ongoing debate and confirms that selective distribution systems are indeed permissible if they are used to preserve and enhance the luxury image of a product. This outcome is not surprising to those familiar with the Court’s case law and is welcomed by companies running selective distribution networks to market their luxury products. However, the judgment is specific to the facts at hand and bans relating to online platforms will have to be reviewed on the basis of the merits of each case and of the products concerned.

The Facts

Coty Germany is a leading supplier of luxury cosmetics and sells certain brands over a selective distribution network. Parfuermie Akzente has been an authorized distributor of Coty brands and have sold Coty products through brick and mortar shops, its own online shop as well as via third party online platforms. Coty’s internet policy provided that

‘the authorized retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorized’.

These provisions were supplemented by rules providing that

‘the authorised retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved’.

The new rules prohibit the use of a different business name and also the recognisable engagement of a third-party undertaking which is not an authorised retailer of Coty Prestige. A footnote to that clause states that

‘accordingly, the authorized retailer is prohibited from collaborating with third parties if such collaboration is directed at the operation of the website and is effected in a manner that is discernible to the public’.

Selective Distribution Systems Compatible with EU Competition Law

It is settled case law that selective distribution systems which are based on objective, qualitative criteria, which are proportionate and applied uniformly and in a non-discriminatory way do not breach the anticompetitive agreements prohibition provided that the product in question necessitates such network in order to preserve the quality and ensure its proper use.

With regard to the use of selective distribution of luxury goods the Court confirms that a system that is established with the purpose of preserving the luxury image of a product is compatible with competition law.

The Court makes explicit reference to its judgment in Pierre Fabre Dermo-Cosmetique and clarifies that this case did not establish a ”principle by which the preservation of a luxury image of a good can no longer be such as to justify the use of a selective distribution system”. In that case the Court had to deal with an absolute ban on online sales which was held not to be proportionate to achieve the preservation of the prestigious image of cosmetic and body hygiene goods.

Online sales restrictions have been in the spotlight for some time and there has been considerable divergence of views in relation to restrictions on sales via third party platform across the EU. This case concerns restrictions relating to luxury products (see further below) and its wider application will have to be assessed carefully. The Court in its judgment makes clear that a clause such in that case amounting to a prohibition on authorized distributors to use in a discernible manner, third party platforms for internet sales of luxury products is permissible provided that three conditions are met:

The clause has objective of preserving the luxury image of the goods in question,

is applied in a uniform and non-discriminatory manner, and

is proportionate.

As the judgment is a preliminary ruling in which the CJEU answers questions on law submitted by a referring national court, it will be for the referring court in Germany to apply the CJEU’s guidance to the facts of the case. However, the CJEU does conclude that the clause appears to be lawful.

Luxury Goods

The Court held that in order to determine the luxury quality of a product not only material characteristics but also its allure and prestigious image are relevant. This is a helpful clarification and assist the self-assessment of companies. While this may be limited to truly prestigious products, like luxury cosmetics in the case at hand, the question will be what other goods fall within this category. Might a sufficiently high price tag itself justify inclusion? The German competition authority has openly expressed concerns of a wide interpretation of this requirement and has for long considered platform bans problematic and it can be expected that the last word on what luxury products mean has not been spoken.

No Customer or Passive Sales Restriction

When concluding that the selective distribution network did not contain so-called hard-core restrictions it followed the Opinion by Advocate General Wahl. He concluded that restrictions as the ones imposed by Coty were closer to methods by which the products can be sold (paras 137, 138 of his Opinion). In his view Coty was not restricting online sales per se, i.e. was not imposing a passive sales restriction in that regard, rather, it was determining the way in which products were sold over the internet. This affected only one of a number of ways Coty’s products could be sold over the internet and did not amount to market portioning or allocating customers. In addition, as authorized distributors were free to advertise via the internet on third-party platforms and to use search engines customers were able to find the online offer of authorized distributor using such search engines.

Wider Implications

The question will be whether parts of the judgment dealing with luxury products can be applied to other categories of products sold through selective distribution systems, i.e. products that require quality control and protection of their image? Some of the findings may well apply more widely, in particular those relating to hard-core restrictions and proportionality.

The court states that the absence of a contractual relationship between the manufacturer and the third party platform is increasing the risk that the manufacturer is unable to effectively enforce and “check the conditions” in which goods are sold. The Court finds that the contractual obligation on the distributor to ensure compliance is not sufficient to attain the defined objective.

Further, the Court finds that third party platforms are a sale channel for “goods of all kind” and concludes that goods that are not typically sold on those platforms or have a distinctive character suggests that sales over dedicated internet sides of the distributor may help the preservation of their status.

Finally, the Court finds that absent an absolute ban on online sales and with distributors being free to sell over their own online shops, a third party platform restriction does not go beyond what is necessary to attain the objective of preserving the luxury image of a good.

Overall this judgment clarifies the law on selective distribution of luxury products across the EU. How this judgment will be applied by national courts and competition authorities, in particular to products that do not squarely fall within the definition of luxury, however, will have to be seen.

]]>https://www.fashionapparellawblog.com/2017/12/articles/antitrust/selective-distribution-systems-and-bans-on-sales-of-luxury-products-via-online-market-platforms-initial-thoughts-on-the-cjeus-coty-judgment/feed/0https://www.fashionapparellawblog.com/2017/12/articles/antitrust/selective-distribution-systems-and-bans-on-sales-of-luxury-products-via-online-market-platforms-initial-thoughts-on-the-cjeus-coty-judgment/A Deeper Dive Into the FTC Crack-Down on Social Media Influencers: What You Should Know Before You Posthttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/C-XVbmlVuwE/
https://www.fashionapparellawblog.com/2017/07/articles/enforcement-of-fashion-laws/ftc-social-media-influencers/#respondTue, 18 Jul 2017 18:16:39 +0000http://www.fashionapparellawblog.com/?p=1991Continue Reading]]>In our previous blog post, “Brands Beware!!! FTC Scrutinizing Influencer Posts for Compliance with Endorsement Guides,” we reported that the Federal Trade Commission (“FTC”) had issued more than 90 letters to brands and influencers, making it clear that it is paying close attention to influencer-based marketing. More recently, the letters have been made publicly available, providing valuable insight into the types of disclosures that the FTC considers unacceptable or inadequate.

Several FTC letters were sent to influencers that could potentially be seen as having a personal relationship with a brand’s owner, such as Victoria Beckham with Dr. Harold Lancer of Lancer Skincare or Lucy Hale with Chiara Ferragni of Chiara Ferragni Collection. The agency reminded these celebrities that disclosure is required even in the absence of a business connection or if product is simply received free of charge.

Another group of letters addressed the inadequacy of disclosures consisting of influencers expressing gratitude to the brands. The FTC expressed concern that these types of disclosures fail to sufficiently explain the nature of the endorser’s relationship to the company. For example, Emily Ratajkowski’s “thanks @nipandfab” or Troian Bellisario’s “Thank you @understatedleather” were not considered appropriate disclosures.

Some influencers, known to the FTC for having existing business relationships with the brands, were singled out for lack of appropriate disclosures. For example, Ashley Benson was put on notice for her use of a hard to understand #sp hashtag in her endorsement post; Scott Disick, affiliated with Pearly Whites Australia, also was admonished for using an otherwise acceptable #ad hashtag, but placing at the end of his post; and Caroline Manzo, a paid spokesperson for HelloFresh, received a warning letter for using the #sp hashtag despite including a statement encouraging consumers to try her code ‘FreshCaroline.’

The FTC also indicated that using #[brandname]ambassador may be inappropriate, at least in certain contexts. Shay Mitchell, a brand ambassador for Biore, was cited for not validly disclosing her relationship with the brand even though she included “BioreAmbassador” in her post. The FTC did not provide an explanation as to why “BioreAmbassador” was insufficient, or whether it may be sufficient in other contexts (i.e., if she had included it more prominently, rather than at the end of the post, following emojis and a potentially confusing #TBT hashtag).

In other letters, the FTC made it clear that, while the #partner hashtag by itself is likely an insufficient disclosure, it may nonetheless be appropriate to use #[brand name]_partner. However, the agency also indicated that an abbreviated version of the brand name in that context may be insufficient due to consumers potentially not understanding the meaning of the abbreviation.

The FTC emphasized the importance of disclosing relationships, including in situations where the brands or products are owned by influencers and are “non-eponymous” (meaning that the brands are not named after the celebrities or influencers) because the public may not be aware of the relationship. For example, Sean Combs’ endorsement of AQUAhydrate water was flagged by the FTC as lacking disclosure, despite the fact that Mr. Combs is an owner and director of AQUAhydrate.

Takeaways:

All material connections should be disclosed, including:

Non-business relationships and friendships;

Free products;

Products owned by endorsers.

Disclosures should be clear and conspicuous, meaning:

Placed above the “more” button in an Instagram post;

Not hidden in a string of other hashtags and/or links.

Avoid vague and/or confusing disclosure hashtags:

Use #ad, #sponsored or #[brand name]_partner and place it at the top of the post;

Retailers and other employers regularly consider the backgrounds of job applicants and employees when making personnel decisions. It is not illegal for employers to ask questions about an applicant’s criminal history, or to require a background check. However, whenever an employer requests background information about a job applicant or employee, the employer must comply with federal and state laws. Within the last five years, employers have been put under increased scrutiny, especially when they require criminal background checks during the hiring process. This article summarizes recent legal trends regarding criminal background checks in the employment context, and discusses how employers—particularly those within the retail industry—can ensure compliance with the law.

Criminal Background Checks in the Retail Industry

On May 15, 2017, the Fortune Society, an advocacy group supporting the successful reintegration of former inmates, filed an Equal Employment Opportunity Commission (EEOC or Commission) charge against Macy’s Inc. The charge alleges that Macy’s criminal background check policies violate Title VII of the Civil Rights Act of 1964 because they allow the retailer to reject otherwise qualified job applicants and employees based on their criminal histories. Fortune Society argues that this practice is discriminatory, as a worker’s criminal history bears no relationship to their ability to perform the particular jobs sought. The charge further asks the EEOC to investigate Fortune Society’s claims against Macy’s on a class-wide basis, and is intended to place the retailer on notice of class-wide discrimination allegations.

This recent EEOC charge against Macy’s highlights an increasingly visible paradox for retailers and other U.S. employers who consider employee criminal history in the hiring process. At one end, employers, particularly retail employers, want to avoid the pitfalls and dangers of negligent hiring. As a service industry featuring significant customer interaction and company asset management, not only must retailers be concerned with hiring those who can successfully represent that values of the company, but retailers also have a strong interest to only hire employees that can interact with customers and other employees without unduly risking safety or incurring legal liability. Nevertheless, despite these valid interests, there is a concern that considering employee criminal history in the hiring process can result in discrimination and significantly disadvantage those attempting to reintegrate after release from incarceration. There is also a concern that former inmates will be dissuaded from ever fully reintegrating into society, solely because they fear that their criminal history will impede their future employment.

The “Ban the Box” Movement

Although removing job barriers to ex-offenders can reduce recidivism, the figures show that employers are reluctant to hire applicants with criminal records that pose an undue risk to co-workers or customers. Employers might have several valid reasons to consider criminal history in their hiring decisions, such as the sensitive nature of certain positions (i.e., in the childcare business or national defense) or the valid interest in considering all available information to weigh a candidate’s qualifications. Nevertheless, despite these legitimate business interests, “Ban the Box” advocates point to the potential discriminatory effects of these hiring practices.

In reaction to the concerns of hiring barriers, the “Ban the Box” legislative movement was born to facilitate providing full employment opportunities to all job applicants, regardless of their criminal history. Specifically, the “Ban the Box” movement calls for a job application process which ensures that employers will judge applicants on their qualifications first, rather than screening applicants based on question on the application. These laws call for delaying any consideration of conviction history until later in the hiring process – usually after a conditional offer of employment has been made – giving applicants an opportunity to explain their criminal history.

“Ban the Box” laws started among public sector employees, and have grown increasingly widespread across the United States in recent years. Now over two-thirds of the U.S. population lives in a jurisdiction with some form of “Ban the Box” law. In a total of 27 states, including California (2013, 2010), New York (2015), Pennsylvania (2017) and Virginia (2015), statewide policies have been passed regulating the use of criminal history in state-employment job applications. Nine states, the District of Columbia, and 29 cities and counties now extend these policies to government contractors.

“Ban the Box” laws have also had an effect on the private employer. Nine states, including Connecticut, Hawaii, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Rhode Island, and Vermont, have mandated the removal of conviction history questions from job applications for private employers. In addition, 15 localities—Austin, Baltimore, Buffalo, Chicago, Columbia (MO), the District of Columbia, Los Angeles, Montgomery County (MD), New York City, Philadelphia, Portland (OR), Prince George’s County (MD), Rochester, San Francisco, and Seattle—have also extended their state’s “Ban the Box” laws to private employers. Thus, if your company has employees within any of these jurisdictions, it is important to reference your local and state laws, or consult your attorney to ensure the legality of hiring practices.

The typical “Ban the Box”, or fair chance law mandates removing questions about convictions from the application, and postpones inquiries of convictions until later in the hiring process. In some states, the laws specifically limit which types of conviction information is permissible in the hiring process, and what types of questions may be asked. Some states and jurisdictions, such as Washington D.C., will even apply financial penalties to employers who request certain forms of criminal background history. There are also special regulations on background checks in the context of particular employment fields, such as health and dependent care, education, law enforcement or public utilities.

It is important to understand the local and state laws applicable where you operate to understand what laws your company must follow.

“Ban the Box” As an Expansion of EEOC’s Guidance

“Ban the Box” laws represent an expansion of the EEOC’s 2012 Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII (the “EEOC Guidance”). Although the EEOC takes the general view that criminal background checks can have a disparate impact against African-Americans or Hispanics, the Commission does provide two avenues for employers to defend its usage: formal validation and individualized assessments. Because the formal validation process requires the use of a complicated methodology and is often very expensive, most employers do not view formal validation as a viable option.

Instead, most employers will conduct a targeted criminal background screen and engage in an individualized assessment of persons with criminal records. Under the EEOC Guidance, the Green factors provide the starting point to analyzing whether specific criminal conduct may be rightly linked to eligibility for particular positions, and whether there should be concerns about the risks of putting a job applicant in a particular position. Green v. Missouri Pacific Railroad, 549 F.2d 1158 (8th Cir. 1977). The Green factors require employers to consider:

The nature and gravity of the applicant’s original offense or conduct;

The time that has passed since the offense, conduct and/or completion of the sentence; and

The nature of the job now held or sought by the ex-offender.

The Green factors allow the employer to look at a potential employee’s conviction history with particularity and individualized scrutiny. They help guide the employer to consider whether a job applicant’s particular criminal past will reasonably affect their future job performance.

The EEOC Guidance further recommends that, after the targeted screen, employers conduct an individualized assessment. The individualized assessment process starts with the employer notifying the job applicant that he or she may be excluded because of past criminal conduct. Then, the job applicant is given the opportunity to demonstrate that the exclusion should not properly apply to him or her by providing individualized evidence. Under the EEOC Guidance, relevant individualized evidence which employers should consider include:

The facts or circumstances surrounding the offense or conduct;

The number of offenses for which the individual was convicted;

Older age at the time of conviction, or release from prison;

Evidence that the individual performed the same type of work, post-conviction, with the same or a different employer, with no known incidents of criminal conduct;

The length and consistency of employment history before and after the offense or conduct;

Rehabilitation efforts, e.g., education/training;

Employment or character references and any other information regarding fitness for the particular position; and

Whether the individual is bonded under a federal, state, or local bonding program.

In accord with the EEOC Guidance, after weighing these factors, the employer may decide whether the individual’s additional information shows that the policy as applied is not job related and consistent with business necessity. If the individual does not respond to the employer’s attempt to gather additional information about his background, the employer may make its employment decision without any individualized information.

Recent Court and Congressional Visibility

The recently filed charge against Macy’s highlights the increased attention that this issue has garnered in both the courts and Congress.

Other private employers have recently faced similar suits, on claims of employment discrimination in the employer’s hiring practices. For example, in Equal Employment Opportunity Commission v. DolGenCorp LLC, the EEOC filed a complaint against Dollar General – DolGenCorp LLC – in the Northern District of Illinois, alleging disparate impact discrimination because Dollar General used a hiring process that considered criminal history. Under DolGenCorp’s allegedly illegal hiring practice, once an applicant gets a job offer, their hiring is contingent on their non “failure” on a criminal background check conducted by a third-party vendor. According to the EEOC complaint, DolGenCorp’s hiring process is discriminatory because the “utilization of [DolGenCorp’s] criminal convictions policy has not been demonstrated to be and is not job-related and consistent with business necessity.” Furthermore, the EEOC takes the view that the policy as applied did not provide for any individualized assessments of applicants who received a “fail” result, to determine “if the reason for the disqualification [was] job-related and consistent with business necessity.” The EEOC’s position is that Dollar General’s criminal background checks on conditional hires, a practice that has been employed in Dollar General’s over 13,000 stores nationwide, dated back to at least 2004 and unequally affected black applicants, causing a “gross disparity” in job opportunities. Ongoing since June 2013, to date, this case is still in litigation.

Congressional leaders have attempted to address this issue through proposed legislation. For example, on April 5, 2017, Rep. Elijah Cummings of Maryland introduced H.R. 1905, or the “Fair Chance Act,” to the U.S. House of Representatives, which proposes that Federal agencies and Federal contractors should be barred from requesting that a job applicant disclose criminal history record information before the applicant has received a conditional offer. It even proposes severe penalties for first and subsequent violators. The companion Senate bill S. 842 was introduced by Senator Cory Booker (D-NJ).

On March 21, 2017, Rep. Tim Walberg of Michigan introduced H.R. 1646 or the “Certainty in Enforcement Act of 2017,” which would amend the Civil Rights Act of 1964 to allow employers to consider or use credit or criminal records in the hiring process. Under the proposed legislation, so long as credit information or criminal record information is mandated by federal, state, or local law, it will be considered to be job related and consistent with “business necessity.” Further, the proposed law would mandate that the use of credit or criminal records under these circumstances could not be used as the basis of liability under any theory of disparate impact.

What Should Retail Employers Do to Avoid Liability?

In the retail industry, where employees must regularly interact with customers and handle cash and credit cards, criminal background checks serve a valuable function. However, with the rise of “Ban the Box” legislation across the United States, employers who regularly conduct criminal background checks must be increasingly aware of the particular laws within their jurisdiction. Nevertheless, there are several specifics steps that employers can and should consider.

First and foremost, employers should consult and continually monitor the relevant state and local laws concerning criminal background checks in the jurisdictions where the employer has employees, as these laws may be subject to change.

Second, employers must be in a position to demonstrate that their hiring policies are in compliance with federal, state and local laws. This can be done by using targeted screens in the hiring process and avoiding a one-size-fits-all approach that subject all job applicants (regardless of the position) to the same criminal background checks. Employers should also ensure that every targeted screen is followed by an individualized assessment that considers the totality of the circumstances of the conviction, and the specific position sought.

Employers should avoid policies that demonstrate an applicant’s automatic exclusions for any criminal conviction history. Employers should also train the human resources department and all decision makers to avoid reliance on hard and fast exclusions. Employers should routinely conduct self-audits to root out inconsistencies in their policies and hiring practices.

Third, the employer must ensure that its practices are in line with the 2012 EEOC Guidance. This means that employers should:

Avoid asking about arrest records on the application;

Avoid considering convictions that were sealed, eradicated, erased, annulled by a court, expunged, or resulted in a referral to a diversion program; and

Include a disclaimer on applications (such as: “answering ‘YES’ to these questions does not constitute an automatic bar to employment,” or “the company will consider various factors, including but not limited to, the nature and gravity of the offense and the position for which you are applying”).

If the EEOC brings suit against your company for an allegedly discriminatory background check, do not give up hope. As was shown in the Sixth Circuit Court of Appeals in EEOC v. Peoplemark, Inc., the EEOC often makes mistakes. For example, in Peoplemark, the Sixth Circuit affirmed the federal district court of Western Michigan that awarded the employer its attorney’s fees and expert fees (totaling $751,942.48). SeeEqual Employment Opportunity Commission v. Peoplemark, Inc, 732 F.3d 584 (6th Cir. 2014).

If your company is in litigation against the EEOC, it is strategically valuable to narrow the scope of the EEOC’s claims early in the case. This means attempting to get the EEOC to identify which specific part of the background check practice causes any alleged disparate impact, and then attacking this narrowed issue in pretrial motions. It is also prudent to challenge the EEOC’s evidence and data supporting its claims for disparate impact by attacking any “expert” reports. As always, specific litigation strategies are dependent on the particular circumstances of a case, and should be individualized to fit your company’s legal situation.

Conclusion

In “Ban the Box” jurisdictions, the safest policy for employers who wish to obtain criminal background checks during the hiring process is to not ask about criminal history until after the conditional offer of employment is made. Some employers with multistate operations even tailor their policies to this lowest common denominator. To minimize the risk of litigation, it is important for every employer to consult federal, state and local laws when making these hiring decisions, and to contact your attorney for further guidance.

*Daniel Masakayan is a summer associate at Sheppard Mullin.

]]>https://www.fashionapparellawblog.com/2017/07/articles/labor-and-employment/criminal-background-checks/feed/0https://www.fashionapparellawblog.com/2017/07/articles/labor-and-employment/criminal-background-checks/Oh, Hadn’t You Heard? You’re Violating French Law Right Now! France Gets Serieuse about Anti-Corruptionhttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/K3c_JrFxo6k/
https://www.fashionapparellawblog.com/2017/07/articles/global-trade/french-law-anticorruption-fcpa/#respondMon, 10 Jul 2017 16:12:56 +0000http://www.fashionapparellawblog.com/?p=1985Continue Reading]]>Ok, ok, don’t panic. Maybe not all of the millions of dedicated readers of this blog are in violation.

Nevertheless, as of June 1, if your company does business in France, it may be time to check your anticorruption compliance obligations.

New French Anti-Bribery Law: The Basics of the Sapin II Statut

The French Anti-Bribery Law, known as Sapin II differs somewhat from the FCPA and the UK Bribery Act in four main ways:

1. Affirmative Obligations. Companies covered by the new law are required to implement an anti-corruption policy infrastructure. The company management and the board of directors will be held to the standard of that policy.

What’s different? The biggest difference in the new Sapin II law is that it requires companies to implement a compliance policy. If a company does not have an adequate policy in place, the company may be subject to liability and company executives and directors may face individual liability. As of now, a failure to implement policy is a violation of Sapin II. Thus the title of this article.

2. Extraterritorial Application. Sapin II applies to any company or group of companies with 500 employees or an annual turnover of EUR 100m, including the French subsidiaries of any foreign company meeting that standard. Also under the law, criminal penalties may be applied to any person “exercising some or all of its economic activity in France or French territory.”

What’s different? The extraterritorial application of the FCPA and the UKBA are not dependent on a company’s size or income.

3. New Anti-Corruption Agency. The law creates the Agence Française Anticorruption (AFA), an agency empowered to sanction companies that fail to implement the required compliance policies. Penalties may range from a formal warning to fines of €1 Million for companies and €200,000 for individuals.

What’s different? In the UK and United States, prosecutors are dedicated to enforcing anti-corruption. France has established a new civil regulator, the AFA, solely to provide support and enforce compliance with Sapin II.

4. Deferred Prosecution Agreements. Investigations under the new law may result in a civil settlement in which the company does not admit guilt, but may face a penalty and a monitorship of up to three years (paid for, of course, by the subject company).

What’s different? Not much. The U.S. Department of Justice has made great use of DPAs and the UK Serious Fraud Office is ramping up its reliance on such agreements.

How to Protect your Business

The good news is that if your company has robust compliance procedures in place to comply with the FCPA or UKBA, you may well be in compliance with Sapin II already. However, you will want to check the eight required policy elements that the law outlines and make sure they are incorporated into your policy, as follows:

A company must integrate a code of conduct explaining the prohibited activity into the its internal regulations of the company;

A company must provide an internal system by which an employee may report violations of the company’s anticorruption policy;

A company must conduct ongoing risk assessments to identify and prioritize its corruption risks;

A company must undertake due diligence on its transaction partners, including customers, suppliers, and intermediaries;

A company must implement accounting controls to ensure transparency in its records;

A company must train employees and management on the risks of prohibited corrupt activity;

The company must institute a regimen of disciplinary measures that may be imposed if an employee violates the anticorruption policy; and

The company must create an internal review of its anticorruption program to assess its effectiveness.

The bad news is, if you find that your anticorruption policy is missing one or more of these elements and you are covered under the law, you need an immediate upgrade.

In any case, if your company is covered by the new law, or if you believe your company may be required to comply with the new law, you should consult with compliance experts. They should be able to help prevent your company from becoming the test case for this new form of French justice.

Companies and law enforcement agencies around the world have been left scrambling after the world’s most prolific ransomware attack hit over 500,000 computers in 150 countries over a span of only 4 days. The ransomware – called WannaCry, WCry, WannaCrypt, or WannaDecryptor – infects vulnerable computers and encrypts all of the data. The owner or user of the computer is then faced with an ominous screen, displaying a countdown timer and demand that a ransom of $300 be paid in bitcoin before the owner can regain access to the encrypted data. The price demanded increases over time until the end of the countdown, when the files are permanently destroyed. To date, the total amount of ransom paid by companies is reported to be less than $60,000, indicating that companies are opting to let their files be destroyed and to rely instead on backups rather than pay the attackers. Nevertheless, the total disruption costs to businesses is expected to range from the hundreds of millions to the billions of dollars.

Last fall, we warned our clients that ransomware – a newly popular form of cyberattack – would require a different approach to cybersecurity and to incident recovery. The urgency of that warning is now clear, as the WannaCry attack is unprecedented in its size and in the speed with which it spread. While entities in North America appear to have suffered minimal damage thus far, and while the particular ransomware variant involved in last week’s incidents has been largely neutralized, even small changes made to the malware code could reactivate it and rapidly deploy a new series of attacks. We are once again urging our clients to proactively prepare, consult with cybersecurity experts, and develop comprehensive cyber incident response plans which contemplate a variety of possible attacks

What is ransomware?

Ransomware is malware that disables systems or encrypts data, critical system files and applications and demands a payment to re-enable or unlock them. There are two kinds of ransomware: “Locker,” which leaves data untouched but keeps owners from accessing it on their devices; and “Crypto-Ransomware” which leaves users with access to their computers but encrypts their files and applications; once the ransom is paid, the hackers send a decryption key.

How does ransomware get onto companies’ systems?

Ransomware may be downloaded in a variety of ways: via “phishing” schemes, in which employees are induced to click on harmful links or download harmful files; by downloading infected apps; or through compromised ads (known as “malvertising”) on mainstream sites. Hackers are increasingly sophisticated and creative in using a wide variety of means to introduce ransomware onto computers and mobile devices.

Unlike typical ransomware, there is no evidence that WannaCry is being distributed via phishing schemes, a spam campaign, or through compromised ads. Instead, WannaCry propagates through a self-spreading worm, a form of attack popularized more than a decade ago but rarely seen since.

How did the WannaCry attack spread?

WannaCry ransomware exploits a flaw in the Windows operating system. Networks of computers, are particularly vulnerable because the ransomware is spread through standard file sharing technology used by PCs. While Microsoft issued a patch for the flaw in March for currently supported operating systems, unsupported Microsoft Windows operating systems, including Windows XP – widely found in in many of the foreign countries hardest-hit by the WannaCry attack – continued to be at risk. Microsoft has since released free patches for its unsupported systems.

How do I protect my company from a ransomware attack?

Regardless of your operating system, you should install any and all available security updates and patches immediately.

If you are running an unsupported operating system – STOP! Upgrade all computers to a supported system immediately.

Never run unlicensed software on your system, as it will not receive the necessary patches or automatic updates.

Back up all of your critical applications and data – and test the backup systems to be sure they can be restored and work properly before you have an attack. Ensure backups are not connected to the computers and networks they are backing up.

Ensure anti-virus and anti-malware solutions are set to automatically conduct regular scans.

Make sure your system includes robust firewalls and your Intrusion Detection/Prevention Systems that are up to date and able to receive updates and patches.

Whenever possible, keep data encrypted, whether in transit or stationary. While encryption will not prevent a ransomware attack, it will protect your data if attackers choose to export it or attempt to use it for financial gain.

Restrict access to sensitive files and ensure personnel only can access the data necessary to perform their jobs.

Ensure all employees are aware of the threats and methods of attack and are following sound cybersecurity policies:

Train – and remind — your employees about the dangers of “phishing” attacks and how to report any attempted attacks

Ensure employees verify the identity of the sender of any links and attachments

Keep a copy of your emergency response plan – including phone numbers of key contacts – somewhere other than on your company’s systems.

What should I do if my company suffers a ransomware attack?

Involve your outside counsel so that your decision-making process and the direction of any investigation can be protected by the attorney-client privilege. You then have several options:

Pay the ransom. The FBI does not support paying ransom to the adversary, especially as there is ultimately no guarantee that system access will be restored;

If you have backups and redundancies, you may be able to restore your systems without paying the ransom;

Call in a security/forensic company for assistance in freeing your systems;

Alert a local FBI field office to report the event and request assistance.

If I choose to pay the ransom, how and where do I get bitcoin? How long does it take?

Do not follow the links suggested by the ransomware without the assistance of your IT department as they may lead to software that will further compromise your computers and files. In most cases, the ransomware will require payment by bitcoin because a payment by bitcoin cannot be reversed, and because it will be very difficult if not impossible for anyone to identify the recipient. If your law firm has experience responding to ransomware, then your law firm can help you with the logistics of buying and sending bitcoin.

You will need to open an account with reputable bitcoin exchange and purchase sufficient bitcoin. The exchange company will need you to link your bank account with the bitcoin wallet provided to you so that you can make an ACH transfer of dollars to your account. The exchange company will need to identify you to comply with its AntiMoney Laundering and Know Your Customer (AML/KYC) compliance procedures. How much information the company will need and how long this will take depends on the amount of the bitcoin you need to purchase, and the speed of the exchange company’s intake process. The exchange company will often require two or three days to pass after the ACH payment is initiated before exchanging the dollars sent for bitcoin. Once the bitcoin is in the bitcoin wallet associated with your account, you will be able to send it to any other wallet, anywhere in the world, nearly instantaneously. If you accidently send it to an address other than the ransomware perpetrator’s, you will have no way to reverse or recover the bitcoin.

Will my cyber insurance cover a ransomware attack?

In general, the largest expenses associated with a ransomware attack arise out of loss of operations. Cyber-insurance may cover the business interruption, although ransom amounts to date have generally been below most policies’ retention threshold. Also, the vector by which the ransomware entered your system may affect how your cyber-insurance treats the attack. Before relying or counting on its cyber-insurance, a company should have a clear understanding what type of events are expressly covered or excluded.

Remember, the side effects of the WannaCry attack are likely far from over. Companies must be vigilant, keeping an eye out for social engineering schemes (i.e. where an individual calls a business claiming to be from Microsoft and offering support if given access to its servers) and variant ransomware created by other attackers and used to exploit the WannaCry attack separately and independently.

]]>https://www.fashionapparellawblog.com/2017/05/articles/privacy/wannacry-ransomware/feed/0https://www.fashionapparellawblog.com/2017/05/articles/privacy/wannacry-ransomware/Buy American and Hire American – New Executive Order Promises to Put American Workers First, But Practical Impacts Remain Unclearhttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/fLUAuW_aWG4/
https://www.fashionapparellawblog.com/2017/04/articles/miscellaneous/buy-american-and-hire-american-new-executive-order/#respondTue, 25 Apr 2017 18:33:20 +0000http://www.fashionapparellawblog.com/?p=1977Continue Reading]]>On April 18, President Trump signed a new executive order (EO) at a ceremony in Kenosha, Wisconsin. The EO is entitled “Buy American and Hire American” and focuses on these two themes, with the President’s stated goal of ending the “theft of American prosperity” by focusing on American workers and products. While the details of how the new EO will be applied will undoubtedly take months to implement (pending numerous agency-level reviews), companies doing business with the federal government, or with an interest in foreign high-skill workers, should be aware of these new developments so that they can prepare for the adjustments they will need to make in the near future, as the President’s efforts to put American workers first take shape.

Buy American

The “Buy American” portion of the EO sets the already obvious Trump Administration policy to maximize the use of goods, products, and materials produced in the U.S. The stated end goals are to “promote economic and national security and to help stimulate economic growth, create good jobs at decent wages, strengthen our middle class, and support the American manufacturing and defense industrial base.” These kinds of objectives have long been a priority for the federal government dating back to the Great Depression, but the new EO re-emphasizes these objectives, calling particular attention to the various “Buy American” laws that currently govern federal spending.

As an initial matter, there is not one, single “Buy American” statute. There are numerous statutes for numerous agencies that impose unique purchasing requirements for that agency and for specific types of products. Some Buy American requirements merely impose an evaluation preference for domestically manufactured products, while other Buy American requirements require the delivery of products that are wholly (both the product and the component materials) manufactured in the U.S. Some Buy American requirements have numerous exceptions available, while others have very few if any – including exceptions relating to the purchase of commercially-available off-the-shelf products. Some Buy American requirements are expressly waived under international free trade agreements (FTAs), which grant our trading partners some degree of reciprocity in the U.S. and foreign public procurement markets. The EO acknowledges that there are multiple, different statutory requirements, but it nonetheless casts all “Buy American” requirements broadly, demanding that agencies take greater steps to ensure that U.S.-made products (and, in turn, U.S. industry) are given the maximum practicable priority over foreign alternatives.

Beyond setting forth the broad policy announcements described above, the EO does little that immediately affects government contractors. Specifically, the EO includes the following directives:

Every agency shall “scrupulously” monitor, enforce, and comply with Buy American laws, to the extent they are applicable (an objective that, frankly, should already be happening under existing laws);

Agencies shall minimize the use of Buy American waivers, ensuring that public interest waivers “should be construed to ensure the maximum utilization of goods, products, and materials produced in the United States” and ensuring that agency heads “take appropriate account of whether a significant portion of the cost advantage of a foreign-sourced product is the result of the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods”;

Within 60 days (by approximately June 19, 2017), the key regulators shall issue guidance (which may well include updates to the regulations) to assist the agencies in better implementing the Administration’s Buy American priorities;

Within 150 days (by approximately September 18, 2017):

Agencies shall:

Assess the ways in which the agencies monitor, enforce, and implement compliance with Buy American requirements;

Assess the use of waivers, including the impacts that such waivers may have on domestic jobs and manufacturing; and

Develop policies that ensure government procurements and grants maximize the use of materials sourced from or manufactured in the U.S.;

The Secretary of Commerce and the U.S. Trade Representative shall also assess the impacts of various free trade agreements on the operation of the various Buy American laws (presumably as a lead-in to potential re-negotiation of these international agreements);

Within 220 days (by November 15, 2017), the key regulators shall submit a report to the President, reporting on some of the various issues identified above, and making recommendations on how to “strengthen implementation of Buy American Laws,” with annual reports recurring through at least 2020.

The practical impact of this new EO remains to be seen, as many of these requirements will need to be implemented through updated regulations and agency memoranda (which are likely to take longer than 60 days to materialize, particularly if the regulations are subject to a notice and comment period under the Administrative Procedure Act). Still, the reality is that nearly all government contracts and grants already have some type of “Buy American” requirement included in the agreement. As such, companies are already “on the hook” for complying with the existing country of origin restrictions, including exceptions available under existing FTAs. The EO contains a provision indicating that it should not be “construed to impair or otherwise affect … existing rights or obligations under international agreements.” As such, until things are actually changed, it does not seem that much has changed. Nonetheless, it seems likely that the new EO will create a fair level of anxiety amongst government purchasing personnel, and many will feel the need to scrutinize more closely the country of origin requirements under existing contracts. Hopefully, cooler heads will prevail and government personnel will understand that until the regulations are actually updated, and until a contract or grant is actually updated to include the new Buy American requirements, nothing has actually changed. For industry, this means that talking through these issues with your customer may be necessary to help everyone understand the difference between the actual, existing Buy American requirements and what people reflexively think they should be (or might be in the future).

Hire American

The “Hire American” portion of the EO sets forth a broad policy to support its theme, but focuses primarily on the H-1B high skilled temporary foreign worker program. This program, which has been in existence since the early 1990s, has been the subject of increasing criticism in recent years, including from the President on the campaign trail. He has promised to significantly reform the program, and this EO begins that process.

The EO first sets forth that it is the Administration’s policy to “rigorously enforce and administer the laws governing entry” of foreign workers into the U.S., citing a statutory provision (8 U.S.C. 1182(a)(5)) that requires, among other things, the Secretary of Labor to certify that there are not sufficient American workers to perform the work that an applicant for admission seeks to perform. This statute actually refers to matters involving sponsorship of permanent residency through labor certification so it remains to be seen how the Administration will apply this to non-immigrant visas without Congressional legislative reform. However, it is nonetheless a clear signal that the Trump Administration intends to ramp up the Department of Labor’s role in regulating, auditing and enforcing this law. The EO goes on to require the Departments of Labor, Justice, Homeland Security and State to propose new rules and guidance to crack down on fraud and abuse in our immigration system in order to protect workers in the U.S. Specifically, it calls on those four departments to develop changes to the H-1B program so that visas are awarded “to the most-skilled or highest-paid” applicants.

Unlike the “Buy American” portion of the EO, the “Hire American” portion does not set a timeline for review and study, but simply directs that the Order be executed “as soon as practicable.” Senior Administration officials have signaled that agencies are ready to move quickly with some of these changes, while others will take time. Some measures, such as stepped-up enforcement by the Department of Labor, could happen within weeks or months, while others, such as changes to the H-1B application process would not take effect before next spring’s H-1B application season, at the earliest.

According to the Government, about 80 percent of H-1B workers are paid less than the relevant median wage in their fields. In order to counteract this alleged undercutting of American workers’ pay, the EO presages changes that Administration officials have described as “a total transformation of the H-1B program.” At the signing ceremony, the President stated that the driving principle behind his initiative is that employers should hire “American workers first.”

The White House has conceded that not all changes it seeks could be accomplished by the Administration alone. It envisions some administrative changes, such as raising visa application fees, raising the wage scale to reduce the undercutting of Americans’ pay levels, and more vigorous enforcement of the rules by the Departments of Labor and Justice. It is also considering changing the lottery system to give foreigners with U.S. master’s degrees a leg up.

In fact, U.S. Citizenship and Immigration Services (USCIS) recently announced that it would view a Level 1 wage for an H-1B position in the IT industry as incompatible with the definition of “specialty occupation.” This alone will have an immediate impact on certain H-1B wages.

By contrast, any changes to the quotas on the issuance of H-1B visas (currently 20,000 exclusively for those with Masters degrees or higher and 65,000 for all others) would have to be implemented by legislation. A number of bills have already been introduced in the 115th Congress to address and reform the H-1B program. Most would either raise the required wage for H-1B recipients or replace the random lottery with a merit-based system, or both. These ideas enjoy bipartisan support.

It is also Congress that defined an H-1B “specialty occupation” as a position requiring the a minimum of a bachelor’s degree and the theoretical and practical application of highly specialized knowledge. 8 USC 1184 (i)(1). Therefore, limiting the scope further to only those with advanced degrees or certain occupations may require legislative reform. However, the executive branch could promulgate new regulations redefining “highly specialized knowledge” to give weight to certain degrees and occupations. USCIS has taken a similar approach in the past with regard to “advanced knowledge” in the context of the L-1B (employee transfer) visa classification.

First, last or in between, American workers and industry could be impacted. Companies should keep a close eye on this developing situation. We will continue to monitor developments at the White House, the agencies and on the Hill, and will update you as appropriate.

]]>https://www.fashionapparellawblog.com/2017/04/articles/miscellaneous/buy-american-and-hire-american-new-executive-order/feed/0https://www.fashionapparellawblog.com/2017/04/articles/miscellaneous/buy-american-and-hire-american-new-executive-order/Brands Beware!!!! FTC Scrutinizing Influencer Posts for Compliance with Endorsement Guideshttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/EW7pMKKmaLw/
https://www.fashionapparellawblog.com/2017/04/articles/enforcement-of-fashion-laws/brands-beware-ftc-endorsement-guides/#respondFri, 21 Apr 2017 21:48:24 +0000http://www.fashionapparellawblog.com/?p=1973Continue Reading]]>In response to a petition from a coalition of consumer groups last year complaining about the need for disclosures by social media influencers, the FTC recently announced on April 19, 2017 that it had issued more than ninety letters reminding influencers and brands that “if there is a ‘material connection’ between an endorser and the marketer of a product – in other words, a connection that might affect the weight or credibility that consumers give the endorsement – that connection should be clearly and conspicuously disclosed, unless the connection is already clear from the context of the communication containing the endorsement.” The FTC explained that material connections could “consist of a business or family relationship, monetary payment, or the provision of free products from the endorser.” A copy of the form of the letter, which explains that clear and conspicuous disclosures are required can be found here.

The FTC raised specific posts with influencers and marketers that were featured in influencer posts. The FTC letter made clear that when disclosures are made they need to be made so that consumers can see them readily at the top of a post so that consumers will not skip over or miss them, meaning that a disclosure placed at the end of a string or below a “more” button is not likely to be conspicuous.

The FTC noted in its press release that “particular disclosures that are not sufficiently clear, pointing out that “many consumers will not understand a disclosure like ‘#sp,’ ‘Thanks [brand],’ or ‘#partner’” to mean that a post is sponsored. The FTC letters included copies of the Endorsement Guides (here) and the publication “FTC’s Endorsement Guides: What People are Asking” (here), both of which are useful for background information. The names of the influencers and brands were not publicly released.

]]>https://www.fashionapparellawblog.com/2017/04/articles/enforcement-of-fashion-laws/brands-beware-ftc-endorsement-guides/feed/0https://www.fashionapparellawblog.com/2017/04/articles/enforcement-of-fashion-laws/brands-beware-ftc-endorsement-guides/“Oh Yes [the Court] Did” — District Court Grants Motion to Dismiss ADA Complaint Until the DOJ Issues Implementing Regulations and Renders Technical Assistancehttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/eExrIEsZzpg/
https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/robles-v-dominos-pizza/#respondFri, 31 Mar 2017 17:12:43 +0000http://www.fashionapparellawblog.com/?p=1965Continue Reading]]>On March 20, 2017, U.S. District Court Judge S. James Otero for the Central District of California in Robles v. Domino’s Pizza LLC, granted defendant Domino’s Pizza LLC’s motion to dismiss without prejudice and ruled that the plaintiff’s class action complaint alleging that the pizza maker’s website, www.dominos.com, and mobile website were not accessible using a screen reader designed for the blind and visually-impaired and therefore in violation of the Americans with Disabilities Act (“ADA”) and California Unruh Civil Rights Act (“UCRA”). The dismissal of the complaint without prejudice was based upon the District Court’s finding that the U.S. Department of Justice (“DOJ”) has not yet promulgated concrete guidance regarding the accessibility standards an e-commerce webpage must meet under the ADA and that this violated Dominos’ due process rights.[1]

This is the first opinion that reconciles the Ninth Circuit’s previous statement that websites are not subject to the ADA “accessibility” requirement unless there is a connection between the good or service on the website and an actual physical location, and the DOJ’s position that websites must be made accessible. Assuming websites are to be made accessible, the question faced by businesses is what specific guidelines they must meet and how they demonstrate compliance.

The District Court rejected the plaintiff’s argument that the Court should apply the Web Content Accessibility Guidelines 2.0 (“WCAG”) that were developed by the Web Accessibility Initiative of the World Wide Web Consortium, a third party non-profit organization because the DOJ’s notice of rulemaking explicitly sought public comment as to whether these standards should be adopted, especially given “the ever-changing nature of many Web sites.” (Emphasis added in the Court’s opinion).

The Court found the Ninth Circuit’s opinion in United States v. AMC Entertainment, Inc., 549 F.3d 760 (9th Cir. 2008), to be entirely on point. In AMC, the Ninth Circuit found that the imposition of vague accessibility standards would violate a defendant’s right to due process because “the text of 4.33.3 did not even provide our colleagues, armed with exceptional legal training in parsing statutory language, a ‘reasonable opportunity to know what is prohibited’ — let alone those of ‘ordinary intelligence.’” Likewise, reliance on the DOJ’s issuance of statements of interest, consent decrees or settlements under the ADA was inappropriate, stating that “the Court concludes that little or no deference is owed to statements made by the DOJ through documents filed in the course of litigation with regulated entities” because the DOJ never provided formal regulatory guidance concerning website accessibility criteria (despite its promise to do so).

The Court dismissed the complaint pursuant to the doctrine of primary jurisdiction recognizing that the complex question of how best to regulate website accessibility has not been answered by the DOJ, notwithstanding the fact that it has been under development since 2010.[2] The Court held that due process required that defendants be afforded adequate notice and reasonable guidance of the official regulations once adopted rather than being held to ambiguous technical standards prior to DOJ adoption. The Court’s opinion also makes clear that simply not mentioning the WCAG 2.0 standards in the complaint will not cure the due process deficiencies and that “[e]ven more problematic to Plaintiff’s case is the apparent absence of any discussion by the DOJ regarding whether a mobile website or mobile application must conform with Apple’s iOS accessibility guidelines.’”

The Court concluded its opinion by calling on the Congress and the DOJ to issue regulations and provide businesses with concrete guidance on how businesses can meet the ADA for the benefit of the disabled community.

Web-facing businesses across the country have been subjected to a tsunami of demand letters and lawsuits alleging class actions for violations of the ADA because their websites allegedly are not accessible to blind or visually impaired individuals. This decision provides a straightforward blueprint for courts and litigants faced with similar ADA class actions until such a time as the DOJ promulgates and issues formal ADA regulatory standards for online and mobile websites and mobile applications. This opinion also provides clarity and welcome relief to businesses facing significant potential liability in the form of injunctive relief, damages, and attorneys’ fees. Nevertheless, prudent businesses need to take the initiative to assess the accessibility of their websites and make sure that potential risks are mitigated by ensuring that individuals with disabilities can independently access their goods and services.

[2] Given the new priorities of the incoming administration, it is not clear when the DOJ will issue the applicable ADA accessibility standards.

]]>https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/robles-v-dominos-pizza/feed/0https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/robles-v-dominos-pizza/Who’s Got the Spirit?! Supreme Court Decides Star Athletic, LLC v. Varsity Brands, Inc.; New Two-Part Test Seeks to Clear Up the “Mess” But Questions Still Remain About the Subjective Nature of the Separabilty Analysishttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/DNL8CU0RQk8/
https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/whos-got-the-spirit-supreme-court-decides-star-athletic-llc-v-varsity-brands-inc-new-two-part-test-seeks-to-clear-up-the-mess-but-questions-still-remain-about-the-su/#respondMon, 27 Mar 2017 21:41:04 +0000http://www.fashionapparellawblog.com/?p=1959Continue Reading]]>On March 22, 2017, the United States Supreme Court, in an opinion written by Justice Clarence Thomas in Star Athletic, LLC v. Varsity Brands, Inc., held that “a feature incorporated into the design of a useful article is eligible for copyright protection only if the feature (1) can be perceived as a two-or three-dimensional work of art separate from the useful article and (2) would qualify as a protectable pictorial, graphic, or sculptural work — either on its own or fixed in some tangible medium of expression — if it were imagined separately from the useful article into which it is incorporated.”[1] The Court set forth a new two-part separability test, resolving a split between circuit courts and upholding the previous Sixth Circuit decision that the stripes, chevrons and other visual elements of Varsity Brands’ cheerleading uniform are eligible for copyright protection.[2] The Court noted that the Copyright Act does not protect “useful articles”[3] but that “the design of a useful article” may be “considered a pictorial, graphic, or sculptural feature” to the extent that “it can be identified separately from, and are capable of existing independently of the utilitarian aspects of the article.”[4] The Court specifically limited the scope of copyright protection, if any, to the designs, excluding the shape, cut and dimensions of the uniforms.[5] The decision also clearly emphasized that it was not deciding whether Varsity’s surface decorations are in fact copyrightable (i.e., satisfy the “modicum of creativity” standard set forth in Feist Publications, Inc. v. Rural Telephone Service, Co., 499 U.S. 341, 358-359 (1991)), and that this determination is remanded for the district court to decide.[6]

The Court noted as a threshold question that separability analysis is needed to determine whether “surface decorations are protected two-dimensional works of graphic art.”[7] Rejecting Star Athletica’s argument that two-dimensional artistic features on the surface of useful articles are “inherently separable” and therefore not subject to the separability test, the Court held that “[t]he ultimate separability question, then, is whether the feature for which copyright is claimed would have been eligible for copyright protection as a pictorial, graphic, or sculptural work had it originally been fixed in some tangible medium other than a useful article before being applied to a useful article.”[8] The Court found that the statute expressly provides that the “‘design of a useful article’ can include two-dimensional ‘pictorial’ and ‘graphic’ features, and separability analysis applies to those features just as it does three-dimensional ‘sculptural’ features.”[9]

The two-part test enunciated in Star Athletic, LLC v. Varsity Brands, Inc. requires first the “separate identification” of the work in question, meaning that an observer must be able to “look at the useful article and spot some two-or-three-dimensional element that appears to have pictorial, graphic, or sculptural qualities.”[10] This first element may be problematic because it entails subjective analysis, as made plain through a comparison of the majority and dissenting opinions. The second element of the test is more difficult to satisfy and requires that the work’s extracted “feature must be able to exist as its own pictorial, graphic, or sculptural work” and not merely be a “utilitarian aspect” of the useful article.[11]

Applying this new two-part test to the facts of the case, Justice Thomas concluded that the decorations are separable from the uniforms and therefore eligible for copyright protection because: (1) one can identify the decorations as features having pictorial, graphic, or sculptural qualities and (2) the surface decorations would qualify as two-dimensional works of art if separated from the uniform and applied in another medium, for example, a painter’s canvas.[12] For the purposes of this analysis, it does not matter that applying such designs onto a canvas will result in creating “pictures of cheerleader uniforms” and would retain the outline of a cheerleading uniform.[13] If an artwork printed on the surface of a guitar could be protected, the fact that the entire design is removed from the guitar’s surface and placed on an album cover corresponds to the shape of a guitar does not “replicate” the guitar as a useful article and should not be a bar to copyright.

The majority opinion dismissed Star Athletica’s contention that the designs are not copyrightable because they serve functional purposes of identifying the wearer as a cheerleader and enhancing the wearer’s appearance and figure.[14] The Court held that copyright protection is not limited to features that are “solely artistic” and may extend to “applied art” that is at least in part utilitarian.[15]

Justice Ginsburg concurred in the Court’s judgment but not in its opinion stating that consideration of the separability test “is unwarranted because the designs at issue are not designs of useful articles.[16] Instead, the designs are themselves copyrightable pictorial or graphic works reproduced on useful articles.”[17] The concurrence further stated that: “In short, Varsity’s designs are not themselves useful articles meet for separability determination under §101; they are standalone PGS [i.e., pictorial, graphic, or sculptural] works that may gain copyright protection as such, including the exclusive right to reproduce the designs on useful articles.”[18]

Justice Breyer, in his dissenting opinion joined by Justice Kennedy, argued that copyright should extend only to designs that are physically separable without destroying the useful object.[19] The dissent stated that: “. . . I do not agree that the designs that Varsity Brands, Inc. submitted to the Copyright Office are eligible for copyright protection. Even applying the majority’s test, the designs cannot ‘be perceived as . . . two- or three-dimensional work[s] of art separate from the useful article.’”[20] The dissent observed that “a decision by this Court to grant protection to the design of a garment would grant the designer protection that the Congress refused to provide.[21] It would risk increased prices and unforeseeable disruption in the clothing industry, which in the United States alone encompasses nearly $370 billion in annual spending and 1.8 million jobs.”[22]

The author would like to thank the contribution of Michelle Juen, who is a legal intern.

]]>https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/whos-got-the-spirit-supreme-court-decides-star-athletic-llc-v-varsity-brands-inc-new-two-part-test-seeks-to-clear-up-the-mess-but-questions-still-remain-about-the-su/feed/0https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/whos-got-the-spirit-supreme-court-decides-star-athletic-llc-v-varsity-brands-inc-new-two-part-test-seeks-to-clear-up-the-mess-but-questions-still-remain-about-the-su/Blockchain Walks the Runway As The New FashTech Fashion Toolhttp://feeds.lexblog.com/~r/FashionApparellLawBlog/~3/JXxdh8iuEJI/
https://www.fashionapparellawblog.com/2017/03/articles/miscellaneous/blockchain-walks-the-runway-as-the-new-fasttech-fashion-tool/#respondFri, 10 Mar 2017 22:36:37 +0000http://www.fashionapparellawblog.com/?p=1955Continue Reading]]>The World Customs Organization and International Chamber of Commerce estimate that seven to eight percent of all world trade each year involves counterfeit goods, resulting in lost sales of $512 billion globally and $200-250 billion in the United States. [1] Blockchain, commonly known as a core component of bitcoin in the finance sector, made its runway debut at the Shanghai Fall 2016 Fashion Week and may prove to be an effective tool against counterfeiting and diversion.

A blockchain is a decentralized digital ledger that records transactions across many computers in such a way that the registered transactions cannot be altered retroactively, ensuring utmost security for its digital assets. In essence, blockchain provides a hack-proof way to store data in two forms of records: transactions and blocks. The records are inherently incorruptible because once a new transaction “block” is time-stamped, recorded and linked to a previous block, it is stored across a shared network to prevent retroactive tampering. Initially heralded as a coding breakthrough for its use with Bitcoins as a way to verify and prevent double spending, the use of blockchain has expanded beyond financial services. Now, major players in the energy, consumer goods, and pharmaceutical industries are experimenting with blockchain as a security measure. In the fashion industry, blockchain is being used as an anti-counterfeiting and anti-diversion tool.

The New York/Shanghai-based fashion apparel brand Babyghost has pioneered the use of blockchain in its partnership with BitSE, a Chinese blockchain start-up. The new Babyghost line first incorporated blockchain technology into its Spring/Summer 2017 collection by embedding an encrypted chip in each design from Babyghost’s ready-to-wear line. A mobile smartphone app called VeChain uses blockchain technology to make the manufacturing and supply chain “public, transparent and traceable.”[2] The chip also can be programmed to store interactive memory such as the design concept, product history and personalized information, including the purchase date and the identity and reason for the purchased — thereby increasing brand value and consumer trust.

The anti-counterfeiting and anti-diversion benefits of blockchain result from its confidential and complete record of “chain of custody.” The blockchain technology provides an effective means of mitigating counterfeiting and diversion. A wide-spread adoption of blockchain in the fashion sector could reduce the number of counterfeit goods that flood the global market. The transparent auditability of blockchain also facilitates supply chain management, creates increased accountability, and makes regulatory compliance more efficient and cost-effective.

While it is too early to tell whether blockchain will succeed as one of the newest fashtech (“fashion technology”) developments, many predict a promising future. Sunny Lou, COO of BitSE, has predicted that blockchain can bring “digital experiences to . . . consumers and enable them to build up a personalized connection with the products they own.” Ryan Orr, CEO of Chronicled — a company that uses blockchain to fight counterfeiting and diversion of sneakers – has forecast that in five years, encrypted chips will be in all luxury goods, noting that the question is “not ‘if,’ but ‘when.’”

For more information about blockchain, contact us for an introduction to Sheppard Mullin’s Blockchain Technology and Digital Currency Team.